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Men in Suits

CARBON TAX AND EU’S LATEST PROPOSITION

In the wake of the distressing climate change, awareness around the subject has prompted many companies to roll their sleeves up and take voluntary measures within their organisation to reduce their carbon footprint. With ESG regulations coming up and the demand for its integration shooting up sharply, many companies are voluntarily taking steps to become more pro-green.


Countries are coming up with their own environmental goals. They want to make the air they breathe in free of GHGs as much as possible. However, many companies do not act in an expected manner to help their nation in the net zero journeys. And thus government intervention is felt necessary by certain countries. One such measure is the imposition of a carbon tax.



Now, what exactly is a Carbon tax? Let’s understand with an example. Suppose ABC company is a cement manufacturer. Now the cement industry is a carbon emission-intensive industry, which accounts for around 8% of all emissions. Since it leads to immense environmental degradation, countries may decide to impose a special tax on the manufacturers of cement. And this tax may be referred to as the “carbon tax”. The intention behind imposing a carbon tax is plain and simple. It will push manufacturers to find greener alternatives if they want to avoid the tax. Because, if they start paying a carbon tax, the cost of their products will increase and eventually the demand will decline, directly affecting their operations and profitability. If they do not cascade the additional cost to their consumers, they will no longer be able to afford continuation. And if they do cascade the added cost, they will lose their competitive edge. It will be a lose-lose situation on both ends. Thus, companies will be left with no option, but to become sustainable.


However, such an imposition might not turn out to be as ideal as its intention is. Because it is not viable for companies to change practices overnight. In the ‘carbon tax’ scenario, they will either start importing products from countries that do not have any such tax or will plan to shift their manufacturing units to such countries. Both these cases are antithetical to the industrial growth of the home country.


The EU has gained a lot of limelight in the past few days because of its carbon tax policy that will apply not only to its own region but to exports within the EU region as well. The EU has pledged to reduce its carbon emissions by at least 55% by 2030 compared to 1990 levels. It believes that the imports bring along with them a lot of emissions accounting for almost 20% of their CO2 emissions. This can significantly create a barrier for the EU to achieve its 2030 mission. In furtherance, they are planning to introduce CBAM (Carbon Border-Adjusted Mechanism), which will be the world’s first ‘transnational carbon tax’ to be operational from 2026. By virtue of CBAM, it has red-flagged energy-intensive industries namely cement, aluminium, iron and steel, fertiliser and electricity. If the EU imports products in the purview of any of these industries, it will levy tax at the borders. It will basically ask its importers to present carbon certificates, the purchase of which will be a form of carbon tax.


Developing countries like India have shown disappointment towards the EU’s proposal as they find the proposal unfair and discriminatory. Developing nations will be at a loss because in comparison to developed and rich countries, they do not have the needed financial and technological assistance to tackle climate change. Even the Green Climate Fund Commitments under which a sum of $100 billion was to be given by developed to developing nations have been delayed to 2025. Under such circumstances, if a tax is levied on imports from developing countries like India, it will make their operations within the EU extremely expensive.


The EU is India’s third-largest trading partner. In 2020-2021, the exports from India to the EU were worth $41.36 billion. The Carbon border tax will increase the prices of Indian-made goods in the EU. The attraction for Indian goods is mainly attributed to their lower prices. It gives India a competitive advantage. If they become expensive, they will no longer be attractive to buyers in the EU. The demand for Indian goods will eventually decrease; this will deeply hurt the Indian economy. Moreover, if companies in the EU prove that the original manufacturers of carbon-intensive products have already paid carbon tax, they can then claim a refund of their own carbon tax paid. This will severely result in market distortion. India here is not trying to evade its climate change responsibilities but the level and speed of decarbonisation are different for developed and developing countries and they cannot be put under the same level of scrutiny.


The burden of dealing with climate change is pushed upon vulnerable countries, while the EU has tried to protect its domestic industry. Even if such a proposal spurs the adoption of cleaner procedures, it is too early for developing countries that are struggling to become sustainable with available funds and technologies in hand. They will surely need more years to adapt to sustainability. But by the time they do so, it does not seem a good idea to penalise their products and hamper their economy. However, we think that the proposal will undergo further discussions and modifications before it is finalised but India should start preparing for any kind of outcome.




You can learn more about the subject by opting for the ESG Expert Certification course from Directors’ Institute - World Council of Directors.


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